I want to illustrate an interesting behavior we often see among investors in the stock market that we don’t often see in other markets. It’s common for investors to get fearful and want to sell investments when the sticker price has dropped in value. They say to themselves, “I’ll pull my money out and wait for things to settle down, because I’m worried about losing all of my money.” That would be like saying, “My home has dropped in value, it’s probably best to sell right now and rent until things have settled down, because I’m worried about losing all of my money.” But they haven’t lost anything because they still own the same house. The same is true for long-term investments – those are not “losing” anything until the investments are sold. Investors still own the same number of shares in whatever companies they are invested in.
Now, I want you to look at the following two figures. Figure 1 shows the fluctuation in value of existing home prices nationally from 2008 to 2023. Figure 2 shows the fluctuation in value of stocks in the S&P 500 from 2008 to 2023. Oddly similar, right?
My point is not to say there is correlation between real estate and the S&P 500, or to infer that things always go up. Rather, I want to highlight the concept of perceived risk. Why are investors tempted to sell stocks during “bad” market periods, but not their homes or real estate? For most of us, we have more wealth tied up into our homes than in the market, so we should be more inclined to sell our homes during “bad” real estate market periods. Yet, we don’t.
There are many factors that influence this behavior, but likely the leading contributors are access and hype. It is easy to check your portfolio value daily. It is not so easy to check your home value daily. Because of the constant scoreboard it’s easy for the media to hype up every small or insignificant change, and we listeners are influenced by that. My recommendation: turn off the news and go live your life. Your portfolio will probably thank you for it.